The measures announced by the Chancellor in his Budget on Wednesday and which apply to Inheritance Tax will apply where the second spouse or civil partner dies on or after 6 April 2017 and is intended to reduce the tax due from an Estate.
It will apply following revisions to be introduced by legislation in the Summer Finance Bill 2015 and will be a Main Residence Nil Rate Band where the main residence is left to one or more direct descendants (e.g. a child, step-child, adopted child or foster child) on death and limited to one residential property, which has been the main residence.
The value of the Main Residence Nil-Rate Band will be the lower of the net value of the interest in a residential property (after all deductions, such as a mortgage) or the maximum amount of that band. The maximum is to be phased in and will be £100,000 for 2017 / 2018, £125,000 for 2018 / 2019 and £175,000 for 2020 / 2021. It will then increase in line with the Consumer Price Index for subsequent years. Eventually, the total amount which can be transferred between married couples and civil partners will be £1m and for single people, £500,000.
Any unused Main Residence Nil- Rate Band will be transferred to a surviving spouse or civil partner and also available if the survivor downsizes or ceases to own a home on or after 8th July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band are passed on to direct descendants.
In addition, the Finance Bill 2016 will provide that where part of the Main Residence Nil-Rate Band might be lost because of downsizing, that part will still be available provided the deceased has left that smaller residence, or assets of an equivalent value to a direct descendant and does not exceed the maximum available under the Main Residence Nil-Rate Band.
Where the net value of an Estate is above £2m, the Main Residence Nil-Rate Band will be tapered by £1 for every £2 that the net value exceeds that amount. It will then be gradually withdrawn and will rise in line with the Consumer Price Index from 2021/2022 onwards.
There is further consultation being undertaken and which will be published in September 2015 ahead of the draft Finance Bill 2016.
The current nil-rate band threshold of £325,000 per person is to remain in place until April 2021.